Valuation of Mortgage Servicing Rights with Foreclosure Delay and Forbearance Allowed
AbstractWe develop a bivariate binomial model to price Mortgage Servicing Rights (MSRs). Our model is an improvement over previous MSR pricing models by explicitly incorporating the realistic assumptions that there are additional costs involved in servicing delinquent loans. In addition to the Hilliard et al. mortgage-pricing tree, we extend additional sub-branches to model the borrower's decision of prepayment, cure, and foreclosure after a loan becomes delinquent. We then investigate how the value of the Mortgage Servicing Right varies with interest rate volatility, house price volatility, delinquency options, deficiency judgments, default penalties, forbearance periods, and speed of adjustments factors. Copyright Springer Science + Business Media, Inc. 2006
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Bibliographic InfoArticle provided by Springer in its journal Review of Quantitative Finance and Accounting.
Volume (Year): 26 (2006)
Issue (Month): 1 (February)
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Web page: http://springerlink.metapress.com/link.asp?id=102990
mortgage servicing right; prepayment; default;
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- Kau, James B, et al, 1995. "The Valuation at Origination of Fixed-Rate Mortgages with Default and Prepayment," The Journal of Real Estate Finance and Economics, Springer, vol. 11(1), pages 5-36, July.
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
- Ambrose, Brent W & Buttimer, Richard J, Jr, 2000.
"Embedded Options in the Mortgage Contract,"
The Journal of Real Estate Finance and Economics,
Springer, vol. 21(2), pages 95-111, September.
- McConnell, John J., 1976. "Valuation of a Mortgage Company's Servicing Portfolio," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 11(03), pages 433-453, September.
- Jimmy E. Hilliard & James B. Kau & V. Carlos Slawson, 1998. "Valuing Prepayment and Default in a Fixed-Rate Mortgage: A Bivariate Binomial Options Pricing Technique," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(3), pages 431-468.
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